Best ways to use the Capital Gains Scheme

The Capital Gains Account Scheme helps you save on long-term gains tax; reason enough to befriend it

Ashwini Kumar Sharma, Mint 23/2/15

source: http://www.livemint.com/Money/7wuOLyuOV3KEZg9zlcI0KM/Best-ways-to-use-the-capital-gains-scheme.html

Selling a house results in you suddenly having a large sum of money. And unless you have already decided how it’s going to be used, chances are that it will either be put in a savings account, or it gets spent. And, of course, there is tax to be paid on the gains. Some of this can be avoided. If you had the house for at least three years before you sold it, the gains are called long-term capital gains (LTCG); if you held it for a shorter period, your profit is called short-term capital gains (STCG).

Tax on long-term gains can be avoided if you utilize the amount within 2 years and 3 years to buy a new property or to construct one, respectively. You can also invest the money in specified bonds. But the amount on which you can get tax benefit is limited to Rs.50 lakh, and you must invest in the bonds within six months from the date of sale.

Another way to save on the taxes is to use the Capital Gains Account Scheme (CGAS). This scheme is meant for those who are not able to re-invest the gain in a new residential property before the due date of filing tax return (typically 31 July). Parizad Sirwalla, partner-tax, KPMG, India, said, “As per domestic tax laws, an individual can avail an exemption from LTCG tax resulting from sale of house or agricultural land (i.e. after holding the same for specified period from acquisition date) by reinvesting the LTCG into another residential house or plot of agricultural land, as the case may be, within specified timeframes of sections 54 and 54B, respectively.”

Let’s take a look at the scheme and how to get the most out of it:

What’s on offer?

An account under the capital gains scheme, which was introduced in 1988, can be opened only with specified banks or institutions. “The deposit can be made in lump sum or in instalments at any time on or before the due date for filing the return of income,” said Rahul Jain, partner, Nangia and Co. Say, you sold a property on 15 January 2015, and are not able to use the gains by 31 July 2015. In such a situation, you should open a CGAS account and deposit the money in it by 31 July. You can deposit in cash, by cheque or by draft.

There are two types of accounts—account A, similar to a savings account; and Account B, which is like a term deposit. You can put your money in any of the two. Account A offers flexible withdrawals, but interest rate offered is similar to what that bank offers on its regular savings account. Account B offers higher interest, which would be similar to what the bank offers on its other term deposits, but withdrawal is not flexible.

If you plan to, say, buy a property after a year, choose account B. But if you plan to build a house soon, and would need money periodically, choose account A. Money withdrawn has to be used within 2 months.

You can withdraw from account B also, but would need to first transfer the money into account A. For such premature transfers, the interest rate will get adjusted.

Do note that “the interest earned on money deposited in CGAS is taxable in the hands of the taxpayer as ‘Income from other sources’,” said Sirwalla.

How much you can deposit varies across banks. At IDBI Bank Ltd, for example, the range of deposit can be Rs.10,000-100 crore. But at State Bank of India, the lower limit is Rs.1,000, and there is no upper limit.

Any gains arising out of property transaction or transfer attracts tax. Short-term gains are taxed at the normal income slab rate of the assessee. Long-term gains are taxed at 20% with indexation. For instance, the acquisition cost of a Rs.60-lakh house purchased in 2010 and sold in 2013, based on the cost inflation index (CII) for 2010 (632) and 2013 (1024) would be about Rs.97 lakh. If this house is sold for, say, Rs.1 crore, the owner makes a gain of about Rs.12 lakh, and this is the amount that she can invest in a CGAS account.

How to use the money?

The scheme has been made for a special purpose, and therefore, money can only be withdrawn for specific purposes. Jain said, “Money deposited in a CGAS account can be utilized only to buy or construct a new asset.” Typically, small sums of, say, less than Rs.25,000 can be withdrawn in cash; for anything more, you will get a crossed demand draft. Initially, to withdraw money, you will have to give an application mentioning the purpose. For subsequent withdrawals, you can use a specified form, in which you will mention details of how the earlier withdrawal was used. Banks may reject further withdrawal if required details are not given. Therefore, keep the bills for materials purchased, payments to contractor, and so on.

“The money must be utilized within 60 days of withdrawal. Any unutilized sum has to be re-deposited in a savings account immediately,” said Jain.

When closing it, the account holder will have to give a specific authority letter or certificate from an income tax officer. Closure would be allowed on terms mentioned in the letter of authority, which could also be a completion certificate or occupation certificate from the authorized government authority. If you are unable to use the gains from the house sold to buy or construct a new house, the amount will be treated as capital gain for the year in which the period of three years from the date of sale of the original house expires. In the example use earlier, if you sold on 15 January 2015, you must deposit the LTCG in a CGAS account by 31 July 2015. The deposited money should be used either before 14 January 2017 to buy a new house, or to construct one before 14 January 2018. If you are not able to do either of these, you will have to pay tax on the balance amount while filing your tax returns for FY2017-18.

Mint Money take

Since property buying and constructing is a long-term process, a CGAS account is handy for those who have long-term gains from the sale. While the scheme is useful, opening an account under it is difficult as all bank branches do not offer these.

To buy a property you have two full years. But if you are planning to build a house, don’t delay for long because you can use this account for only up to three years, and construction takes a lot of time. Also, do remember that the house will not be considered as complete till you get its occupation certificate, and that your claim for tax exemption is based on the completion of your house.

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